Gaming the scholarship gift

Dibye Bass’ 12-year-old son, like thousands of children, has benefitted from a school choice program championed by the Trump administration that offers big-money donors tax breaks which critics say are too generous.

Bass’ son was bullied in a Virginia public school and a scholarship tax credit program was his way out and into a private school that the single mother said has made a difference in her son’s life. Regardless of questions raised about the way the programs are financed, she said she is grateful.

“I see it as something that encourages you to give more. Not just for a tax break but because you’re doing something good,” she said.

But here’s what’s unusual, if not controversial, about the scholarship programs: Wealthy donors can potentially “profit” from their contributions through extensive tax benefits that can drain money from state treasuries which fund public services — including public schools.

The programs are available in 17 states and are being considered by legislators in several others. They are praised by Secretary of Education Betsy DeVos — a longtime school choice advocate — and are the focus of two congressional bills that seek to create a federal version of the program.

All the programs basically work this way: Individuals and businesses make cash or stock donations to scholarship granting organizations. The organizations award scholarships to qualifying families with K-12 students, primarily children in failing public schools or whose families' income meets the state’s poverty threshold. Students can then attend a private or religious school of their choice. What makes these programs unique is that donors get a full or partial credit toward their state taxes, which they are not allowed when donating to most other charities, and this allows them to realize a sizable tax advantage when combined with a federal deduction on the same gift. Plus, in some states, donors also get a state deduction.

“What these scholarship tax credits do is they super charge that incentive up to 100 percent of the amount donated,” Carl Davis, senior tax expert with the Institute on Taxation and Economic Policy, said. “And in the right set of circumstances, they’re receiving more back in tax breaks than they ever donated in the first place. … They’re able to claim a state tax credit and a federal deduction on a single donation and this is often profitable for them to do so.”

Davis’ organization released a report last month in conjunction with the American Association of School Superintendents that highlights nine states — Alabama, Arizona, Georgia, Montana, Oklahoma, Pennsylvania, Rhode Island, South Carolina and Virginia — where donors can make a profit from their donation.

In Alabama, according to Davis, if a donor in a 28 percent tax bracket contributed $50,000 to a scholarship tax credit program, the donor would get a $50,000 tax credit to offset state taxes owed. Combine that tax credit with a federal deduction — calculated at the same tax rate — plus an additional state deduction for federal taxes paid, and the donor could receive up to $63,300 in tax cuts, which is a $13,300 profit.

Davis argues these programs divert much needed tax revenue away from state resources.
“Any other public service you can imagine can potentially suffer because of these scholarship tax credits,” he said. “There will be less funding for public schools, less funding for roads and bridges, health care, public safety.”

A Scripps survey of states found that from 2012 to 2016 at least $2.5 billion in tax credits were granted through the various state scholarship tax credit programs.

The programs aid in the redirection of money from state treasuries toward private schools at a time when states and the federal government are reducing public school funding. According to a report by the Center on Budget and Policy Priorities, state funding for K-12 schools drastically declined in 31 states in 2014 compared to 2008, the most recent data available. President Trump, meanwhile, is calling for a $9.2 billion cut in the overall fiscal year 2018 federal education budget.

The generous incentives make donating to scholarship tax credit programs more lucrative than giving to most other non-profit organizations, which allow tax deductions but not credits. A tax deduction lowers the amount of income you’ll be taxed on. A tax credit reduces the taxes you pay on a dollar-for-dollar basis.

Scripps obtained a list of corporate donors to Pennsylvania’s scholarship tax credit programs. Contributors can receive up to 90 percent of their donations back in tax credits. The documents show companies, including Comcast of Pennsylvania, PNC Bank, N.A. and CIGNA Health, donated millions of dollars from 2012 to 2014 and received the maximum tax credit. Depending on their tax bracket, some of the corporations might have been able to realize a profit after claiming a federal tax deduction.
The programs are such an attractive tax tool that they are being promoted as a profit-maker on websites of scholarship granting organizations, private schools and accounting firms across the country.

However, in Florida, where donors to its program can receive a 100 percent tax credit, protections are in place that prevent donors from combining state credits and federal deductions to make a profit.

Supporters of the programs maintain the focus has always been about offering families educational choices beyond public education.

“We shouldn’t be talking about mechanisms, we should be talking about what works for kids,” said Dr. Robert Enlow, president and CEO of EdChoice, a non-profit based in Indianapolis, Ind., that advocates nationally for school choice. “There is a growing awareness that one size doesn’t fit all. And there’s also a growing awareness in urban areas that it [public education] hasn’t worked for families.”
Enlow said scholarship tax credit programs simply allow private individuals to support families. “We need more families being able to have access to more money,” he said.

Securing money for families is often left to non-profit organizations approved by the state’s scholarship tax credit program. In Virginia, the Diocese of Arlington is one of dozens of scholarship granting organizations in the state. Its schools accept students in the program, and its foundation raises money from donors.

“When we are soliciting these funds from donors, who, they might not otherwise donate without the credit, I think it can really be a win-win for both.” said Dr. Jennifer Bigelow, superintendent of schools for the diocese. “You have families who may have always desired a private school education or a Catholic school education, but it has not been a financial reality for them. And so these scholarship programs have been instituted to make it more attainable.”

The popularity of the state programs has spurred congressional bills that seek to create a national scholarship tax credit program to support K-12 students. If passed, the legislation would allow individuals and corporations to receive a federal tax credit on their contributions to scholarship granting organizations anywhere in the country.

The proposed legislation currently has no caps on the total amount of tax credits the federal government program would grant. However, there are dollar limitations on how much individual and corporate taxpayers can receive and safeguards would prevent donors from receiving multiple federal tax credits and deductions on a single donation.

But Davis argues of the state programs, “When you receive your full donation back … that’s not charitable.”

This story is the result of a three-month Scripps News investigation led by Angela M. Hill, national investigative producer. Angela is part of the Scripps Washington Bureau based in Washington, D.C. You can contact Angela or follow her on Twitter @AngelaMHill. Producer Mark Fahey created the interactives.